Challenger faces more dividend cuts

The
Challenger Infrastructure Fund
(CIF) has cut its interim distribution by 42 per cent to 7¢ a share, but there’s speculation that this might not be the last of such cuts.

Challenger’s global bulk liquid chemicals storage terminals LBC and its United Kingdom gas network company Inexus have relatively large capital expenditure outlays, with the latter struggling from high gearing levels.

Furthermore, UBS points out that the fund has constricted cash flow with no free cash available to equity holders from Inexus and very little from LBC. This means Challenger will likely need to rely on debt and cash on its balance sheet to fund a large part of the dividend.

This could pressure management to cut distributions even further as the fund will need cash to fund its growth in the coming years.

On the upside, UBS still thinks the stock is attractive as it is trading well below its sum-of-parts valuation and 12-month price target of $2.16. The broker also believes that its underlying assets have a good future with reliable cash flow.

Not all are convinced though, as brokers polled on Bloomberg are divided on their outlook for the stock. Some believe any upside is already priced in as the stock has gained about 8 per cent over the past 12 months when other utility stocks are flat.

Challenger is also trading on a one-year forward price-earnings multiple of 23 times, compared with the 18 times average for its peer group.

The stock closed up 3.5 per cent to $1.79 on Monday and has a forecast yield of close to 8 per cent.